Skating to where the puck will be...

November 16, 2009

The China Myth

In truth, China is more vulnerable that the US is. Yves has some good stuff on this today. Here's more from the FT's Abrose Evans Pritchard:

It is fashionable to talk of America as the supplicant. That misreads the strategic balance. Washington can bring China to its knees at any time by shutting markets. There is no symmetry here. Any move by Beijing to liquidate its holdings of US Treasuries could be neutralized – in extremis – by capital controls. Well-armed sovereign states can do whatever they want.
If provoked, the US has the economic depth to retreat into near autarky (with NAFTA) and retool its industries behind tariff walls – as Britain did in the 1930s under Imperial Preference. In such circumstances, China would collapse. Mao statues would be toppled by street riots.

Of course revaluation of the renminbi is an effective devaluation of the dollar.

Doubtless the Chinese will recall, with an eerie sense of deja vu, that America paid for the Vietnam war by stuffing Europe full of dollars, and then devaluing the dollar.

The Communist Party of China still has a very large card up its sleeve. It could completely deregulate the economy and so create a massive boom, the mother of all bubbles, and see how the United States likes that. A risky move to be sure, but they might just get away with it.

Those, on the other hand, who would enjoy seeing the statues of Mao toppled and blood in the streets, might pause to think about what would replace the Communist Party. There is more than a possibility that it would be an aggressively nationalistic and xenophobic regime. Difficult to see how this would be in the interests of the United States, or of anyone else.